Financial Trading & Investment

Price Action Trading Strategies

Forex trading involves a lot of things other than just opening and closing orders. Traders find themselves having to choose between different trading strategies. Most of the trading strategies depend on the use of technical indicators, fundamental analysis, technical analysis and price action.

The most popular strategies are based upon the price action. Price action is simply the movement of the market price. When we talk of the ‘action’ we refer to the manner in which the market prices vary. A trader that uses price action strategies will be targeting to study the market so as to make subjective decisions on trading with respect to the current and definite price movements.

The trader observes the relative size, shape, position, growth and volume of the bars on an open-high-low-close chart bar or candlestick chart, starting as simple as with a single bar, but most often combined with chart formations found in broader technical analysis such as moving averages, trend lines or trading ranges.technical analysis such as moving averages

The best traders for price action trading

Use of price action is best suited for the retail traders, speculators, arbitrageurs and trading corporations that hire traders. Therefore this is useful as long as you are a trader regardless of the kind of a trader you are; whether an intraday trader, a scalper, a long term trader or a short term trader.

What do traders use in price action trading?

The tools and patterns that the traders can use vary from simple price bars, price bands, break-outs, trend-lines, or complex combinations involving candlesticks, volatility and channels.
Psychological and behavioral analyses and ulterior actions, as set by the trader, additionally form up a vital side of value action trades. For example, regardless of what happens, if a stock swinging at 1.9998 crosses the personally set psychological level of 2.0000, then the trader could assume an extra upward move to require a protracted position. Different traders could have opposite interpretations once the 2.00000 level is hit. One trader may assume there is a price reversal and therefore takes a shorter term position.

Another traders still in the same market and trading the same currency pair can interpret it in another totally different manner. Therefore it is evident that the traders can have different interpretations, outlined rules and completely different activity understanding of the same market. This is different from the use of the rest of the trading strategies which would see the traders interpret the market in a similar manner.

There are specific things that the Forex traders should understand before getting into using the price action trading. These essentials include:

Price Patterns

There are dozens of price patterns that are represented by bar and candlestick patterns. Given the right market situation, these patterns provide potential trading opportunities and are referred to as trading setups.

Some of the most important bar or candlestick patterns are:

Pin bars

These are bars that have a longer tail than the body. Mainly this will happen when the market is struggling to move but there are other forces that are forcing the prices in the opposite direction. So the price will for example rise during candle formation, but will then be brought down leading to the formation of a bar with a long tail and a short body.

Hikkake Trade Setup

This is used to take advantage of the false breakouts using pending orders. There are different Hikkake Trade Setups for selling and for buying.

For you to use the Hikkake Trade Setup to open a long position, there have to be an inside bar, the next bar should have a lower high and lower low. Then a buy pending order is placed at the high of the original inside bar for the next three bars and the order should be canceled if not triggered after three bars.

For you to use the Hikkake Trade Setup to open a short position, look for an inside bar, then the next bar has a higher high and higher low. Then a sell is placed at the low of the original inside bar for the next three bars and closed if not triggered after three bars.

market swings a lotMarket Swings

The Forex Market prices move in swings. Price action trading interprets higher highs and higher lows as an uptrend, and lower highs and lower lows as a downtrend.

One of the distinguished theory on this kind of behavior of market swings is the Elliot Wave Theory which postulates an eight-wave pattern as a fractal of market movement.

Support & Resistance

Price action traders also scheme support and resistance levels using swing pivot points. Support areas are likely to reject price upwards, and resistance areas tend to prevent the market from rising above it.

Support and resistance are core price action trading concepts. The key to successful price action trading lies in finding effective support and resistance areas.

Using Trend Lines and Channels

Trend lines connect swing pivots to track trend, and serve as support and resistance.

In a bull trend, trend lines are drawn by connecting pivot lows. In a bear trend, trend lines are drawn with pivot highs.

By extending a parallel line from the trend line, we can form a trading channel that is useful for anticipating support and resistance areas.

Advantages of using action trading

The advantages of price action trading are:

  1. Self-defined methods providing flexibility to traders.
  2. Relevancy to multiple asset classes.
  3. Straightforward use with any trading software package.
  4. The chance of up-front back testing of any known strategy on past information.
  5. It makes the traders to feel in control due to the fact that the traders are permitted to make their own trading decisions.

Steps involved in action trading

In almost all the price action trading there are two steps that are used. These steps are:

  1. Identifying a situation. The trader have to identify a specific situation where he or she can be safe to trade. Such trading situations are breakouts, bull and bear trends.
  2. Then the trader should identify trading opportunities. Once the trader has identified a trading situation the trader sets his or her target and where and when he or she will trade.

Example:

A trader identifies a breakout upwards (identifying a trading scenario) in EURUSD through a resistance. The trader then waits for the market prices to hit a certain level, let’s say of $1.59876 (identifying a trading opportunity). From here the trader can opt to open a buy or a sell according to his or her own anticipation of the market.

trading strategiesVarious trading action trading strategies

There are three general strategies used in price action trading. These strategies are meant to help the traders in making correct market reading, reactions and market analysis.

The strategies include:

One of the oldest and most important things in Forex trends is allowing the market trend to be your friend. You have to be on the right side of the market trend for you to be safe. It is just as in swimming, where it is easier to follow the river current, rather than to try swim against it.

In any successive trade that the trader will realise a profit, especially the long term trades, the traders have to interpret the market correctly to get into the trend and not try to trade against the market trend.

2. Using Price Action in Highlight Valuable Support and Resistance

The trader can use the price action in determining support levels (low levels where the market reaches and bounces back up) and resistance levels (high levels where the market level riches and bounces back down). These levels have proven to be of great importance when it comes to catching the right trading opportunities.

3. Using Price Action Formations to Trigger into Positions

This is using set conditions by the trader to open positions. The trader sets certain conditions after studying the market after which he or she is set to place orders. The condition will depend on different things that the trader looks into.

4. Price Action trading using Volume

It is a common thing that the volume increases in the direction of the trend and decrease if moving opposite the trend. This is sometimes used with the price action trading.

Linking volume and price action has led to the “Volume Spread Analysis” trading technique.

5. Price Action trading in conjunction with use of Indicators

Even with the stress on price analysis, most of the price action traders still find it hard to trade without using some indicators. However the traders mostly use the more familiar indicators like the Moving Averages, MACD, RSI and similar rather than other custom indicators.

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Shaw Academy

Updated: Aug 25, 2015

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